There are market watchers who hold that HCI is far too diversified and that its penchant for buying depleted or asset-rich companies is a distraction

Hosken Consolidated Investments (HCI) will be hoping sceptical investors, particularly those critical of its recent foray into struggling liquor group KWV take a long, hard look at recent developments around clothing and textile conglomerate Seardel.

There are market watchers who hold that HCI is far too diversified, and that its penchant for buying operationally depleted or asset-rich companies is a distraction from its core proposition in gaming and media.

This clearly has been a sore point for HCI. In HCI’s annual report of 2009 CEO Johnny Copelyn took issue with “one of the very few analysts writing reports on the company” for concluding it was time to double the discount on the HCI shares “because we had bought an asset (Seardel) in the clothing industry and this showed a complete lack of focus by management”.

In the same annual report Copelyn stressed HCI had seen an opportunity to take over the oldest and largest listed clothing and textile group in the country with a net asset value (NAV) of about 200c/share for 50c/share (secured via a rescue rights issue of R300m).

He added that HCI had hedged its exposure to a R50m downside and 80% of the upside on 500m shares.

While Seardel is at a crucial point of its operational turnaround, the investment has already brought a sterling return for HCI. An initial investment of R250m (perhaps slightly higher accounting for a chunk of shares bought from Liberty Life last year) has turned into an investment worth more than R600m.

The latest run in Seardel shares has been spurred by the long-awaited settlement of litigation involving the former directors of the company, which really related to the late founder and CEO Aaron Searll.

The Searll estate has coughed up a large chunk of value — about R247m (equivalent to 39c/share) — in settlement. This involves writing off a R98m loan from a Searll-controlled entity and handing back (at the original purchase price) several properties in Cape Town that were bought by Searll-aligned companies as well as a R10m cash payment.

The litigation settlement pushes Seardel’s intrinsic NAV to 216c/share, meaning a value of around R1,4bn on the business. In essence, the recent push in the share price merely tracks the new NAV disclosure, still leaving the Seardel shares trading at a hefty 45% discount.

The “handing back” of previously owned properties bumps the value of the portfolio of industrial properties to close to R900m. Seardel has already started redeveloping properties where textile or clothing operations have closed down. It has disclosed plans to create secured industrial parks in its New Germany and Mobeni properties.

Seardel CEO Stuart Queen says two of the three properties in question are currently occupied by Seardel entities, with the third (the Observatory property) being partially occupied by a Seardel subsidiary, Seartec. available to be let.

While ongoing (value-adding) property developments and subsequent rental flows might prompt investors to close the share’s discount to NAV, there surely must be a temptation at HCI to look at an offer to buy out minorities.

Part of the litigation settlement also sees the Searll family transferring 14,5m ordinary shares and 11,9m N- shares to Seardel as a set-off against claims by the company.

If these shares are cancelled, HCI’s stake in Seardel’s ordinary shares will edge through the 80% mark, while HCI’s position in the smaller pool of N-shares — taken in conjunction with the shares held by the SA Clothing & Textile Union — will shift closer to the 50% mark.

It would cost around R150m to take out minorities, small change for HCI. But would significant minority investors, like Hugh Robert’s CeeJay Trust and 36One Hedge, bail at a big discount to intrinsic NAV?

Source: Financial Mail – Marc Hasenfuss